Tech Barons Take on New Project: Energy Policy

MATT RICHTEL

Monday

Jan 29, 2007 at 4:44 AM

Technology investors are on a crusade to influence energy policy because they have a big stake in the outcome.

SAN FRANCISCO, Jan. 28 — President Bush set broad goals last week for the adoption of alternative energy. Hoping to take on the role of filling in the details is an unlikely group: Silicon Valley’s technology investors.

These venture capitalists, backers of giants like Google and Genentech, have traditionally been free-market advocates, favoring ideas and innovation over government intervention. Now they are heading to Washington on a crusade to influence energy policy because they have a big stake in the outcome.

The investors in recent years have poured billions of dollars into alternative energy start-ups in areas like solar and wind power or the production of fuel for cars from feedstock and crop waste. Many of these projects, they say, could stall without subsidies or government mandates for greater energy efficiency.

These barons of the new economy are not new to politics, though their interest in energy places them in a powerful spotlight. And it puts them in conflict with the oil and gas industries, which are more politically potent and have far deeper pockets.

“It’s very different from the business world, where you come in with a good idea and leave with a deal,” said Mark Baldassare, research director for the Public Policy Institute of California, a nonpartisan research group. The question, he said, is whether venture capitalists “have the patience to be part of the political process.”

The venture capitalists say they have earned political credibility through their track record of creating jobs and technological change. However, if they are to translate their formula for innovation successfully to the world of energy, they say, they need the government to be, in effect, an investment partner.

The message to politicians is that “you have to create a playing field to make it possible for us to back these companies,” said Nicholas Parker, chairman of the Cleantech Group, a research and trade organization representing venture investors in alternative energy.

In recent months, venture capitalists have met with most of the ostensible 2008 presidential candidates, members of Congress, and officials in the Bush administration and the Energy Department, pushing their ideas for things like tax subsidies and efficiency requirements.

With President Bush’s State of the Union address emphasizing alternative energy, and with the ascension of Democrats, who are less aligned with oil interests than the Republicans, the time might seem right for Silicon Valley to speak up.

Mr. Baldassare and other political analysts said the venture capitalists could become a powerful part of the realignment of energy politics. They are lending a new voice to the debate, one that politicians are likely to listen to given the investors’ reputation as smart backers of next-generation companies.

“They’re responsible for huge chunks of economic activity,” said Ken Cook, president of the Environmental Working Group, a nonprofit organization, noting that the investors are also major potential donors. “If they choose to get the ear of Congress, they can do it more and more, and they’re just waking up to that.”

Yet the venture capitalists have already been handed one stinging defeat.

In November, California voters rejected Proposition 87, which would have taxed gasoline and used the proceeds to back alternative energy. The initiative enjoyed much voter support at first, but it was defeated after a $100 million lobbying effort by oil companies portrayed the venture capitalists as greedy seekers of tax subsidies who wanted to burden the state with bureaucracy.

“There’s a lot of money on the other side, a lot of power and influence,” Mr. Baldassare said.

Lobbyists for oil and gas companies spent $59 million in 2005, compared with the $2 million spent by venture capitalists, said the Center for Responsive Politics, a nonprofit Washington group that tracks campaign contributions and lobbying.

The venture capitalists say that their research and lobbying helped with the creation and passage of a California bill that Gov. Arnold Schwarzenegger signed into law in September, capping the state’s greenhouse gas emissions at 1990 levels by 2020.

When it comes to supporting alternative energy sources, the venture capitalists are backing up their words with money. In 2006, venture capitalists put $727 million into 39 alternative energy start-ups, compared with $195 million in 18 such firms for 2005, according to the National Venture Capital Association.

More than a third of the 2006 investments went to technologies related to ethanol, a gasoline alternative that is made from corn and other plant material. Mr. Bush has high hopes for ethanol and other alternative fuels, calling for them to take the place of 35 billion gallons of gasoline by 2017.

One venture-backed ethanol start-up is Altra, a 50-employee company based in Los Angeles. It offers a twist on ethanol production by making the fuel from nonedible plant matter, producing what is known as cellulosic ethanol.

Altra’s process can create “large volumes of fuel with significantly lower emissions than gasoline, and in a fashion that does not compete with the food supply,” said John Denniston, a partner at the Silicon Valley investment firm Kleiner Perkins Caufield and Byers. The firm invested an undisclosed amount in Altra as part of a financing round that raised $50 million, Altra said.

Mr. Denniston said Altra could benefit from policy changes. For example, the government could require that cars be able to run on either ethanol or gasoline, or it could set up a national carbon trading system that would increase demand for ethanol by forcing companies to find greener alternatives to oil and gas. Such a system would put a limit on the volume of carbon dioxide emissions and then create a trading system where companies could buy credits that would permit them to emit more.

Mr. Denniston also wants to see a change to the so-called blender’s credit, a 51-cents-a-gallon subsidy that goes to the company that mixes gasoline with ethanol, typically one of the major gas companies. He would like that money to go to producers like Altra. And he wants the subsidy to rise when the price of oil falls, or drop when oil prices rise.

Not surprisingly, the oil companies are not ceding any turf. Edward Murphy, group director for refining and marketing for the American Petroleum Institute, an industry trade group, said the venture capitalists were “somewhat naïve” to think that they could easily replace gas, oil and coal, which account for 85 percent of energy production.

The investors, Mr. Murphy said, are begging for handouts from the government because their ideas are not realistic alternatives to oil.

If a company’s product sells for less than gasoline, “you don’t need government help,” he said. “Consumers will be beating a path down to your door.”

Venture capitalists are also facing skepticism from within their own ranks. Some are reluctant to sign on to the idea of any government assistance, saying this undermines the long-term health of the technology. Even those who support subsidies seem to be walking a fine line.

“In the past, venture capitalists would say, ‘Let the market decide.’ But the reality is that sometimes the market needs a boost,” said Mark Heesen, president of the National Venture Capital Association, an industry trade group.

To bring about the change, venture capitalists have begun forming committees and lobbying groups. Kleiner Perkins has formed the Greentech Innovation Network to bring together entrepreneurs, scientists, academics and policy makers. The National Venture Capital Association has a committee focused on energy policies.

At the same time, some venture capitalists are acting as lone rangers. The most visible and one of the most outspoken is Vinod Khosla, a founder of Sun Microsystems and now a partner at Khosla Ventures.

In September he put together a 19-page paper calling for new energy policies — from mandating that 10 percent of gas stations have at least one ethanol pump to requiring that 70 percent of new cars sold in the United States by 2010 be able to use more than one type of fuel.

Mr. Khosla said that since October he had met with senators and House members, governors and most of the likely presidential candidates, though he declined to name names.

“I’m a very small fry compared to the influence of the oil business in the political world. I’m less than peanuts,” Mr. Khosla said. But he is optimistic about the prospects for alternative energy.

“There is zero question in my mind we can replace all the petroleum used in cars,” he said.

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